HUD has issued a moratorium on its practice of insuring mortgages for those who receive so-called down payment assistance from sellers through non profit "gift-giving" entities.

Down payments for real estate purchases have always been difficult for the average consumer to come up with. Over the years, buyers have gotten increasingly creative about circumventing that major obstacle to home ownership. Some borrow money from friends and relatives, some stash extra cash into a savings account, and others sell their cars to generate available bucks. A popular way to come up with a down payment is to have it handed to you by a generous non-profit organization.

How the programs work

Mortgage companies frown upon sellers literally paying the buyer's down payment, so the feat is accomplished via a third party by means of so-called "down-payment assistance programs" that have cropped up in recent years. Borrowers with good credit can turn to non-profit corporations to provide a solution. These companies, and many others like them, earn a fee from the seller for providing the service, and they collect their share after the transaction has been closed.

The basic way it works is that the buyer and seller agree to use an assistance program. Then, the program contributes funds as a no-strings-attached gift to the buyer to offset the down payment. After the sale is consummated, the seller donates that amount, plus a service fee, to the assistance program company. The company providing the money earns cash on the fee it collects, and uses the proceeds to continue its mission.

Nehemiah Corporation, for example, a not-for-profit community development corporation specializing in home ownership, affordable housing, and community development, runs the nation's largest privately funded down payment assistance program. The company has provided more than $900 million within the past decade to fund down payments for nearly a quarter of a million buyers.

HUD skeptical of down-payment assistance

Critics of programs like Nehemiah's argue that sellers simply raise their sales prices enough to compensate for the donation, and then buyers roll the higher cost into their new mortgage. According to a recent article in the New York Times, officials at HUD are also skeptical of the program, and have stopped supporting the practice. They claim that this technique encourages borrowers to buy houses-and incur mortgage debts-that they can't really afford. With the current avalanche of mortgage delinquencies, organizations like HUD are under increasing pressure to curb the tide of bad loans by adopting more stringent guidelines. HUD says that the default rate on down payment assisted loans is twice as high as it is for mortgages that involve conventional down payments, so it has stopped insuring assisted down payment loans.

However, many people, including members of Congress and the Mortgage Bankers Association, are advocates of the assistance programs. Meanwhile, Nehemiah and another down payment assistance company, AmeriDream, have sued in federal court in an effort to have the HUD moratorium overturned.

Published on October 31, 2007